When we last checked in with Bauer Performance Sports Ltd. in June 2011, the company was facing challenges in its core hockey business and was expanding into a new sport via acquisition. Reflecting the uncertainty, shares of the sporting goods maker were trading at a discount to peers.
It all sounds very much like today – which means investors may want to consider whether events will unfold in the same way they did back then.
Two years ago, the stock market fretted about slow growth in hockey gear and overlooked the company's fledgling efforts in lacrosse. But the company soon overcame the doubters and its shares doubled between June 2011 and March of this year.
Now, as Bauer marks its entry into baseball and softball equipment, the doubters are again focusing on the company's hockey business. The recent pullback in Bauer's share price gives investors an opportunity to bet that the market is underestimating the company once again.
Certainly, all is not well in the hockey-goods business, even setting aside whatever long-term effects we may see from this season's National Hockey League lockout. In Bauer's recently completed third quarter, traditionally its softest, hockey revenue fell 9 per cent, year-over-year.
The problems? Competitors are slashing prices. Retailers have reduced orders as a result of the shortened NHL season. Consolidation among retailers has meant tighter management of inventories and fewer orders.
Even the federal government's elimination of tariffs on hockey goods, expected to be a long-term benefit to Bauer, causes near-term problems. The short notice of the change means Bauer has all sorts of equipment on shelves that is priced to cover the past tariffs. Analyst Mark Petrie of CIBC believes retailers want to cut those prices and are already asking Bauer "to write cheques" to compensate them for the reductions.
In short, Bauer is "skating on slush, " according to Mr. Petrie, who recently downgraded the stock to "sector performer."
So it seems likely that Bauer will report choppy results in coming quarters as it works its way through current market conditions. The upside for the stock may be limited in 2013.
But long term? Keep an eye on Bauer's diversification efforts. The company entered the lacrosse equipment market three years ago, buying into one of the fastest-growing North American sports. Analyst Dave King of Roth Capital partners, who has a "buy" rating and $14 target price, believe lacrosse will grow from 2 per cent of Bauer's sales in fiscal 2012 to 10 per cent in fiscal 2014, in part as a result of the 2012 deal to buy Cascade Helmets Holdings, a maker of lacrosse head gear.
The company's fledgling apparel business, roughly 7 per cent of the company's sales, posted 60 per cent gains in the third quarter. That offset the hockey-equipment declines and helped Bauer post an overall sales gain of seven per cent.
The company's latest expansion effort is a deal to buy Combat Sports, a former Bauer partner with multiple patents for the use of composites in baseball and softball bats, and hockey and lacrosse sticks.
Combat Sports was in bankruptcy, and Bauer says the undisclosed purchase price will be funded from "cash on hand," meaning it's less than $8-million.
"The acquisition provides Bauer with strong R&D and intellectual property while also broadening the company's reach into baseball – a market similar in size to the $650-million hockey equipment market with strong growth in emerging markets like Latin America," says Mr. King.
Martin Landry of GMP Securities notes that when Bauer shares traded at $11.45 last week, they were priced anywhere from 28 per cent to 43 per cent below sporting goods peers, depending on the earnings multiple chosen. While some of this was merited as a result of Bauer's smaller size and higher debt levels, he says, the size of the discount is "unwarranted."
"In our view, Bauer is a growth story, and can generate earnings growth in the double-digit range for the foreseeable future due to its multiple avenues of growth," says Mr. Landry, who has a "buy" rating and $15-a-share target price.
"As Bauer delivers on growth expectations it should lead to a [higher valuation]."
That would turn that slushy skating smooth. Or be a game-winning goal or a home run. Or whatever metaphor suits the next new sport that Bauer turns to for profitable growth.
David Milstead